American Express sets aside $265 million for losses Company is planning to cut 1,700 jobs

October 03, 1991|By Kurt Eichenwald | Kurt Eichenwald,New York Times News Service

NEW YORK -- American Express Co., faced with mounting problems in its credit-card operations, said yesterday that it was setting aside $265 million for expected losses and to pay for a reorganization of its flagship business that will involve the loss of 1,700 jobs.

The reserves principally reflect major problems with the company's 4-year-old Optima credit-card program, which has encountered larger-than-expected delinquencies from its wealthy cardholders.

Unlike the company's charge cards, which must be paid monthly, the Optima card, like Visa and Master Card, extends credit in exchange for a finance charge.

The huge reserves will yield the first loss ever for the company's Travel Related Services division, which has long been the money machine for the entire company.

American Express estimated that the division would post an annual loss of $50 million to $75 million but made no estimate on the company's overall earnings.

The pressures on American Express, long a dominant force in the financial services industry, stem from a tide of defaults on personal credit lines and underscores the harsh impact the recession has had on the white-collar workers who make up the backbone of the company's credit-card business.

The troubles also reflect, company officials said, the frustration of working in the credit business in an era when racking up unpayable debts has become increasingly common.

"Societal factors are now making bankruptcy more acceptable, with some raising bankruptcy to a fine art," said Harvey Golub, vice chairman.

But American Express officials also conceded that their strategy for the credit-card business was flawed. "We haven't very successfully run a revolving-credit business," said James D. Robinson III, chairman and chief executive.

"This has been a very well-run company, but the entropy has finally caught up with them," said John Keefe, an analyst with Lipper Analytical Securities. "The company got to be too big to avoid economic cycles, and now they are in the soup with the rest of us."

Even with the waves of defaults, Optima, which was introduced in 1987, has been a relatively good business. "Their costs of operation were relatively low," Mr. Keefe said of Optima. "This has actually been a fairly economical investment for them."

The ailments in the Optima card operation have not spread to the company's charge card lines like its green American Express card or its Gold or Platinum cards.

As a result of the company's reorganization, about 1,700 of American Express' employees, or 3 percent of the work force, will lose their jobs, with about 1,500 of those jobs in the New York area.

The employees will include managers as well as lower-level staff members.

A $110 million charge for the reorganization will be used to pay for the costs of closing some operations, as well as severance pay and other costs associated with the dismissals.

American Express will also take a new reserve of $155 million to cover expected losses from Optima and other credit lines.